Financial Terms Dictionary

Training Wheels:
Some of these words are tame. Some are spicy. All are NEED TO KNOW. Learn them; love them. There is just enough information here for you to knock the socks off a financial planner and your water cooler buddies. The full glossary is a behemoth and well, I’m still working on it.

The Financial Terms Dictionary need to know – the Essentials:

Analyst
A financial professional who conducts analysis of securities to determine their “fair” value. No formal education is required. “Sell-side” analysts typically work for investment banks and brokerages and sell or publish their analysis. “Buy-side” analysts typically work for the mutual fund companies or institutions that use the analysis to make investment decisions for the funds they manage.

Beta
A measure of the movement in price of a security relative to the stock market as a whole or within industry sectors to evaluate risk. Volatility. A beta above 1.0 shows greater volatility than the overall market and a beta below 1.0 less volatility. Sounds simple? Tell that to the scores of academics trying to develop the next “beta.” This is the simplest way to score an investment, but may or may not give you the information you need.

Capital gains distributions
The distribution usually in December of a gain on the sale of an investment. Your mutual fund trades (buy/sell) throughout the year; they must recognize gains and losses. The tax consequences of how long the investment was held determine how happy you are with your fund adviser. Avoid buying shares of mutual funds just prior to a capital gains distribution.

Churn
Speaking of buying and selling, churning is unconscious or conscious overtrading by a broker in a customer’s account. If your broker is compensated on a per transaction basis, there may be (is) temptation to trade too frequently. Tell the bastards to bite you and find a personal financial advisor who charges a set fee, or better yet, if you have investable assets under $200,000, look at wealthbuilding tip #3. No load, index funds are the best bet for 95% of the US population.

Compounding
Reinvesting the earnings as they pay out. If you have a dividend stock, DRiPs automatically reinvest those dividends. More commonly known in simple savings terms, compounding is the power to let your money work for you while you sleep.

Decapitation
What happens when you prematurely sell your portfolio or remove “just a little” from your growing savings…. See compounding.

Depreciation
Reduce the recorded value of an asset over a predetermined time. As it applies to your portfolio depreciation concerns physical assets, not stocks. However, depreciation is an important concept for reviewing the financial statements of companies you consider for investment. You do read financial statements, right?

Fiduciary
Highest standard of care imposed at either equity or law. A fiduciary is expected to be extremely loyal to the person they owe the duty (the “principal”): they must not put their personal interests before the duty.

HSA (Health Savings Account)
This can be a little tricky, but essentially an HSA allows you to save pre-tax dollars into an account hosted by a financial institution. That financial institution allows you access to your money most often through checks and debit card to pay for medical expenses. The definition of medical expenses can be a gray area. Aspirin and doctor’s visits count, but chocolate does not – clearly an oversight.

Index fund
A no nonsense passively managed mutual fund that seeks to match the performance of a particular market index. Index funds have lower expenses and outperform the majority (90%) of actively managed mutual funds. They are the sexiest thing since sliced bread. Show up in an index fund and watch the ladies drool.

Individual Retirement Account (IRA)
Available in many forms the most common is a simple tax-deferred retirement account set up with a financial institution. You may invest in a number of securities depending on the flexibility of the financial institution hosting your account. Congress regulates how much you may contribute based on your income level and age.

Naked options
Do you keep having that dream where you’re asked to give a speech and you realize you are naked … in front of your boss … and your mother-in-law? Yeah, these are like that. This is when you sell a security that you do not own. Do not try this at home. You sell XYZ at $50 a share today and you are obligated to fill the order next Tuesday. You better pray the price of XYZ drops below $50/share and that you have enough sense to buy it, because . . . . If XYZ skyrockets to $400/share by the time you fill the order, guess what. You are out $350/per share plus whatever your broker charges you for trading. Options are more expensive to trade than regular shares.

No-load fund
The only funds you want to consider. This is a mutual fund that does not charge a sales commission. But watch out for other fees . . .

Preferred stock
Think this is a regular (common) stock on steroids? NO! More like a cross between a stock and a bond, the preferred stock holds a senior claim to the company assets during liquidation ahead of common stock holders. But preferred stocks enjoy less appreciation in the good times. They do however bag some sweet dividends when the company can pay them … typically. The core right is that of preference in dividends. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied. Indeed the dividend rights are often cumulative, such that if the dividend is not paid it accumulates in arrears. Sweet!

Real estate investment trust (REIT)
A tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes by paying out at least 95% of their earnings in the form of dividends to shareholders. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms.

12b-1 fee
The bastard fee. Hidden for many years until concerned citizens (and Congress) intervened, these are mutual fund advertising and public relations expenses that you pay for by buying particular mutual funds…. It’s like wearing a Rolex logo on your boxer briefs, except you are single, and no one is looking. This fee sucks the life-force out of your mutual fund. Even if the average return for your fund is higher than a comparable fund, over time the effect of compounding really slaps you hard. Compounding can work against you when it comes to fees.

Volatility
The magnitude and frequency of movement in the price of a security.

Wash sale rule
“Under the wash sale rules, if you sell stock for a loss and buy it back within the 30 days, the loss cannot be claimed for tax purposes. This rule is designed to prevent taxpayers from selling stock to claim the loss while buying it back within a short period to retain ownership. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold.” This is bad form and if caught you will have the snot knocked out of you. (Thanks for the definition Motley Fool!)

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